UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission File No. 0-25905
June 30, 2002
GUARANTY FINANCIAL CORPORATION
Virginia 54-1786496
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1658 State Farm Blvd., Charlottesville, VA 22911
(Address of Principal Executive Offices)
(434) 970-1100
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes _X_ No ___
As of August 1, 2002, 1,962,777 shares of Common Stock, par value $1.25
per share, were outstanding.
GUARANTY FINANCIAL CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
INDEX
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Part I. Financial Information Page No.
------------------------------ --------
Item 1 Financial Statements
Consolidated Balance Sheets as of June 30, 2002
(unaudited) and December 31, 2001 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and
2001 (unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Six Months Ended June 30, 2002
and 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II. Other Information
---------------------------
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
2
Part I. Financial Information
------------------------------
Item 1 Financial Statements
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
($ In Thousands)
June 30, December 31,
2002 2001
-------------- ---------------
ASSETS (Unaudited)
Cash and cash equivalents $ 15,253 $ 12,437
Investment securities
Held-to-maturity 883 970
Available for sale 16,626 20,567
Investment in FHLB and other stocks 1,972 1,972
Loans receivable, net 162,883 177,579
Accrued interest receivable 1,039 1,245
Real estate owned 418 764
Office properties and equipment, net 7,908 8,110
Other assets 4,513 1,522
-------------- ---------------
Total assets $ 211,495 $ 225,166
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Interest bearing demand $ 27,596 $ 25,460
Non-interest bearing demand 25,550 22,110
Money market accounts 21,722 22,394
Savings accounts 13,318 12,992
Certificates of deposit 89,682 117,676
-------------- ---------------
177,868 200,632
Bonds payable 434 595
Advances from Federal Home Loan Bank 9,000 1,000
Accrued interest payable 54 137
Payments by borrowers for taxes and insurance 357 165
Other liabilities 442 546
-------------- ---------------
Total liabilities 188,155 203,075
-------------- ---------------
Convertible preferred securities 6,012 6,012
-------------- ---------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1 per share, 500,000
shares authorized, none issued - -
Common stock, par value $1.25 per share,
4,000,000 shares authorized, 1,962,777
issued and outstanding (1,961,727 in 2001) 2,453 2,452
Additional paid-in capital 8,960 8,953
Accumulated comprehensive loss (288) (695)
Retained earnings 6,203 5,369
-------------- ---------------
Total stockholders' equity 17,328 16,079
-------------- ---------------
Total liabilities and stockholders' equity $ 211,495 $ 225,166
============== ===============
See accompanying notes to consolidated financial statements.
3
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------- ------------ ------------
(unaudited) (unaudited)
Interest income
Loans $ 2,915 $ 3,957 $ 5,975 $ 8,555
Investment securities 398 612 810 1,119
------------ ------------- ------------ ------------
Total interest income 3,313 4,569 6,785 9,674
------------ ------------- ------------ ------------
Interest expense
Deposits 922 2,582 2,131 5,175
Borrowings 199 171 378 507
------------ ------------- ------------ ------------
Total interest expense 1,121 2,753 2,509 5,682
------------ ------------- ------------ ------------
Net interest income 2,192 1,816 4,276 3,992
Provision for loan losses 25 75 50 225
------------ ------------- ------------ ------------
Net interest income after provision
for loan losses 2,167 1,741 4,226 3,767
Non-interest income
Deposit account fees 189 204 372 381
Mortgage banking income 153 295 467 470
Investment sales commissions 38 59 64 153
Gain on sale of Investments 17 - 17 -
Other 148 42 263 158
------------ ------------- ------------ ------------
Total non-interest income 545 600 1,183 1,162
------------ ------------- ------------ ------------
Non-interest expense
Personnel 1,142 1,150 2,286 2,411
Occupancy 282 423 571 762
Information services 287 290 578 568
Marketing 29 54 43 117
Deposit insurance premiums 23 26 48 52
Other 328 387 659 754
------------ ------------- ------------ ------------
Total non-interest expense 2,091 2,330 4,185 4,664
------------ ------------- ------------ ------------
Income before income taxes 621 11 1,224 265
------------ ------------- ------------ ------------
Provision for income taxes 193 4 390 90
------------ ------------- ------------ ------------
Net income $ 428 $ 7 $ 834 $ 175
============ ============= ============ ============
Basic and diluted earnings
per common share $ 0.22 $ 0.00 $ 0.42 $ 0.09
============ ============= ============ ============
See accompanying notes to consolidated financial statements.
4
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2002 2001 2002 2001
------- ------- ------- -------
(unaudited) (unaudited)
Net income $ 428 $ 7 $ 834 $ 175
------- ------- ------- -------
Other comprehensive income:
Unrealized gain on securities available for sale 830 81 617 722
------- ------- ------- -------
Other comprehensive income, before tax 830 81 617 722
Income tax expense related to items of other
comprehensive income (282) (28) (210) (246)
------- ------- ------- -------
Other comprehensive income, net of tax 548 53 407 476
------- ------- ------- -------
Comprehensive income $ 976 $ 60 $ 1,241 $ 651
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
5
GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
2002 2001
-------- --------
(unaudited)
Operating Activities
Net Income $ 834 $ 175
Adjustments to reconcile net income to net cash provided
(absorbed) by operating activities:
Provision for loan losses 50 225
Provision for loss on sale of other real estate owned 40 -
Depreciation and amortization 295 719
Deferred loan fees (34) (75)
Net amortization of premiums and accretion of discounts 122 60
Gain on sale of loans (467) (586)
Gain on sale of securities available for sale (17) -
Originations of loans held for sale (20,076) (36,255)
Proceeds from sale of loans 28,956 36,841
Gain on sale of other real estate owned (18) -
Changes in:
Accrued interest receivable 206 343
Other assets (126) (151)
Accrued interest payable (83) 369
Prepayments by borrowers for taxes and insurance 192 (24)
Other liabilities (104) (390)
-------- --------
Net cash provided by operating activities 9,770 1,251
-------- --------
Investing activities
Net decrease in loans 6,085 11,487
Mortgage-backed securities principal repayments 240 88
Purchase of securities held to maturity (406) -
Proceeds from maturity of securities held to maturity 250 -
Purchase of securities available for sale - (12,000)
Proceeds from sale of securities available for sale 4,559 -
Proceeds from sale of real estate owned 470 757
Purchase of bank-owned life insurance (3,000) -
Increase in bank-owned life insurance (53) -
Origination of servicing rights - (314)
Proceeds from sale of office properties and equipment 21 -
Purchase of office properties and equipment (136) (312)
-------- --------
Net cash provided (absorbed) by investing activities 8,030 (294)
-------- --------
Financing activities
Net increase (decrease) in deposits (22,764) 10,244
Proceeds from FHLB advances 35,000 31,000
Repayment of FHLB advances (27,000) (41,000)
Proceeds from issuance of common stock 8 -
Principal payments on bonds payable, including unapplied payments (228) (56)
-------- --------
Net cash provided (absorbed) by financing activities (14,984) 188
-------- --------
Increase in cash and cash equivalents 2,816 1,145
Cash and cash equivalents, beginning of period 12,437 15,550
-------- --------
See accompanying notes to consolidated financial statements.
6
GUARANTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2002 and 2001
(unaudited)
Note 1 Principles of Presentation
The accompanying consolidated financial statements of Guaranty Financial
Corporation ("Guaranty") have not been audited by independent accountants,
except for the balance sheet at December 31, 2001. These financial statements
have been prepared in accordance with the regulations of the Securities and
Exchange Commission in regard to quarterly (interim) reporting. In management's
opinion, the financial information presented reflects all adjustments, comprised
only of normal recurring accruals that are necessary for a fair presentation of
the results for the interim periods. Significant accounting policies and
accounting principles have been consistently applied in both the interim and
annual consolidated financial statements. Certain notes and the related
information have been condensed or omitted from the interim financial statements
presented in this Quarterly Report on Form 10-QSB. Therefore, these financial
statements should be read in conjunction with Guaranty's Annual Report on Form
10-KSB for the year ended December 31, 2001. The results for the three and six
months ended June 30, 2002, are not necessarily indicative of future financial
results.
The accompanying consolidated financial statements include Guaranty's accounts
and its wholly-owned subsidiaries, Guaranty Capital Trust I and Guaranty Bank,
and Guaranty Bank's wholly-owned subsidiaries, GMSC, Inc., which was organized
as a financing subsidiary, and Guaranty Investments Corporation, which was
organized to sell non-deposit investment products. All material intercompany
accounts and transactions have been eliminated in consolidation.
Amounts in the year 2001 financial statements have been reclassified to conform
to the year 2002 presentation. These reclassifications had no effect on
previously reported net income.
Note 2 Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Note 3 Earnings Per Share
Basic earnings per share is based on net income divided by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share shows the dilutive effect of additional common shares issuable under stock
option plans. The basic and diluted earnings per share for the three months and
six months ended June 30, 2002 and 2001, have been determined by dividing net
income by the weighted average number of shares of common stock outstanding
during these periods. The following table indicates the weighted average shares
outstanding for each period.
June 30, June 30,
2002 2001
----------------- ------------------
Basic shares 1,962,777 1,961,727
Diluted shares 1,970,631 1,961,727
7
Note 4 Loans
The loan portfolio is comprised of the following:
June 30, December 31,
2002 2001
----------------- ----------------
(In thousands)
Mortgage loans:
Residential $ 27,550 $ 39,864
Commercial 9,731 16,277
Construction and land loans 37,941 36,307
----------------- ----------------
Total real estate loans 75,222 92,448
Commercial business loans 67,347 66,603
Consumer loans 22,746 20,973
----------------- ----------------
Total loans receivable 165,315 180,024
Adjustments:
Allowance for losses (2,517) (2,512)
Deferred costs 85 67
----------------- ----------------
Total loans receivable, net $ 162,883 $ 177,579
================= ================
Note 5 Allowance for Loan Loss
The following is a summary of transactions in the allowance for loan loss:
June 30, December 31,
2002 2001
---------------- -----------------
(In thousands)
Balance at January 1 $ 2,512 $ 2,396
Provision charged to operating expense 50 333
Recoveries added to the reserve 3 9
Loans charged off (48) (226)
---------------- -----------------
Balance at the end of the period $ 2,517 $ 2,512
================ =================
8
Note 6 Investments
The investment portfolio is comprised of the following:
June 30, December 31,
2002 2001
--------------- ---------------
In thousands)
Held to maturity:
Mortgage-backed securities $ 480 $ 720
U.S. Government obligations 403 250
Available for sale:
Corporate Bonds 8,593 12,597
U.S. Government obligations 8,033 7,970
Other:
Federal Home Loan Bank stock 1,550 1,550
Federal Reserve Bank & other stocks 422 422
--------------- ---------------
$ 19,481 $ 23,509
=============== ===============
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Guaranty Financial Corporation ("Guaranty") is a single bank holding company
organized under Virginia law that provides financial services through its
primary operating subsidiary, Guaranty Bank (the "Bank"). The Bank is a full
service commercial bank offering a wide range of banking and related financial
services, including time and demand deposits, as well as commercial, industrial,
residential construction, residential and commercial mortgage and consumer
loans. Guaranty Investments Corporation, a subsidiary of the Bank, provides a
full range of investment services and, through a contractual arrangement with a
third party, sells mutual funds, stocks, bonds and annuities.
Management's discussion and analysis is presented to aid the reader in
understanding and evaluating the financial condition and results of operations
of Guaranty. The analysis focuses on the consolidated financial statements, the
footnotes thereto, and the other financial data herein. Highlighted in the
discussion are material changes from prior reporting periods and any
identifiable trends affecting Guaranty. Amounts are rounded for presentation
purposes, while the percentages presented are computed based on unrounded
amounts.
Analysis of Financial Condition
Total assets decreased 6.1% to $211.5 million at June 30, 2002, from $225.2
million at December 31, 2001. Cash and cash equivalents increased $2.9 million
or 22.6%, to $15.3 million at June 30, 2002, from $12.4 million at December 31,
2001. Net loans were $162.9 million at June 30, 2002, a decrease of $14.7
million, or 8.3%, from net loans of $177.6 million at December 31, 2001. Total
deposits at June 30, 2002, were $177.9 million compared to $200.6 million at
December 31, 2001. FHLB borrowings were $9.0 million at June 30, 2002, compared
to $1.0 million at December 31, 2001. Total stockholders' equity at June 30,
2002, increased by $1.2 million to $17.3 million from $16.1 million at December
31, 2001.
The factors causing the fluctuations in the major balance sheet categories are
further discussed in the following sections.
Loans
During the first six months of 2002, Guaranty continued to strategically
reposition its loan portfolio. Net loans receivable decreased by 8.3% to $162.9
million at June 30, 2002, from $177.6 million at December 31, 2001. This change
was primarily attributable to a $12.3 million reduction in residential mortgage
loans and a $6.5 million reduction in commercial mortgage loans. During the six
months ended June 30, 2002, Guaranty originated $20.1 million in residential
mortgage loans and sold $28.5 million in residential mortgage loans in the
secondary market. Residential mortgage loans held for sale were $1.7 million at
June 30, 2002, down from $14.3 million at December 31, 2001. All other segments
of the loan portfolio were relatively constant through the first six months of
2002.
Investments
Total investments declined by 17.0% to $19.5 million at June 30, 2002, compared
to $23.5 million at December 31, 2001. The majority of this change was due to
the sale of approximately $4.0 million in corporate bonds for a gain of
approximately $17,000.
10
Real Estate Owned
Real estate owned decreased to $418,000 at June 30, 2002, from $764,000 at
December 31, 2001. The decline was primarily due to the sale of a residential
property during the period. No material losses are anticipated on the ultimate
sale of the remaining properties.
Office Properties and Equipment
Guaranty's investment in office properties and equipment decreased to $7.9
million at June 30, 2002, from $8.1 million at December 31, 2001. This decrease
was primarily due to depreciation of existing assets.
Other Assets
Other assets increased to $4.5 million at June 30, 2002, primarily due to the
purchase of $3.0 million of bank owned life insurance.
Deposits
Deposits were $177.9 million at June 30, 2002, a decrease of $22.7 million, or
11.3%, from total deposits of $200.6 million at December 31, 2001. Demand
accounts increased by 11.6% to $53.1 million from $47.6 million during the
current year as Guaranty has continued to reposition its deposit funding mix.
This increase represents Guaranty's continued emphasis on providing full service
banking relationships to its customers. Certificates of deposit comprise 50.4%
of total deposits at June 30, 2002, compared to 58.7% at December 31, 2001.
FHLB Borrowings
Guaranty's borrowings from the Federal Home Loan Bank ("FHLB") at June 30, 2002
increased to $9.0 million from $1.0 million at December 31, 2001. Guaranty was
able to reduce its cost on certificates of deposit by increasing its borrowings
from the FHLB. At June 30, 2002, Guaranty's available but unused borrowings with
the FHLB were approximately $10.6 million.
Stockholders' Equity
Stockholders' equity at June 30, 2002, increased by 7.8% to $17.3 million from
$16.1 million at December 31, 2001. The primary factors for the increase were
the year to date net income of $834,000, $8,000 related to the issuance of 1,050
shares for the 2002 annual retainer for outside directors, and an increase in
the mark to market gain adjustment (after the effect of income taxes) of
Guaranty's available for sale investments by approximately $407,000.
11
Results of Operations
Net Income
Guaranty reported net income of $428,000 ($.22 per share) for the three months
ended June 30, 2002, compared with a net income of $7,000 ($.00 per share) for
the three months ended June 30, 2001. The increase in the net income was
primarily due to the combination of higher net interest income, reduced
operating expenses and a lower provision for loan loss. Net income of $834,000
for the six months ended June 30, 2002 was an improvement over the $175,000
reported for the same period a year ago for the same reasons.
Net Interest Income
Net interest income for the quarter increased by 20.7% to $2.2 million from $1.8
million for the same quarter of the previous year. The continued decline in the
cost of interest bearing deposits had a positive impact on the Company's net
interest margin. Reduced interest expense more than offset the decrease in
interest income that resulted from the reduction in average loans and
investments held for the respective periods. The net interest margin increased
to 4.53% for the three months ended June 30, 2002, compared to 3.13% for the
same period a year ago. During the most recent quarter, the cost of certificates
of deposit declined to 3.40% compared to 5.95% for the same period a year ago.
Total cost of interest bearing deposits declined to 2.38% from 4.99% for the
same quarterly periods. Interest rates on earning assets did not fall as
dramatically. The yield on earning assets for the three months ended June 30,
2002, was 6.84% compared with 7.86% for the same period a year ago. The effect
of the increase in the Company's net interest margin more than offset the lower
amount of the Company's loan and investment portfolios in the second quarter
2002 compared to the same period a year ago. For the six months ended June 30,
2002, Guaranty's net interest income increased by 7.1% to $4.3 million from $4.0
million for the same period a year ago. The following table summarizes the
factors determining net interest income (dollars in thousands).
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------------ ----------------- ----------------- -----------------
Average Interest Earning Assets $194,151 $233,052 $197,627 $232,945
Average Yield 6.84% 7.86% 6.92% 8.37%
Average Interest Bearing Liabilities $172,811 $216,690 $176,564 $217,938
Average Cost 2.60% 5.10% 2.87% 5.26%
Interest Spread 4.24% 2.77% 4.06% 3.12%
Interest Margin 4.53% 3.13% 4.36% 3.46%
12
Provision for Loan Losses
Guaranty recorded a provision of $25,000 and $75,000 for the three months ended
June 30, 2002 and 2001, respectively. The decrease in the provision for the
current year resulted from the decrease in the size of the loan portfolio and
the increased level of the allowance for loan losses as a percentage of total
loans. For the six months ended June 30, 2002, Guaranty's loan loss provision
was $50,000 compared with $225,000 for the same period a year ago. The allowance
for loan losses is maintained at a level considered by management to be adequate
to absorb future loan losses currently inherent in the loan portfolio.
Management's assessment of the adequacy of the allowance is based upon type and
volume of the loan portfolio, past loan loss experience, existing and
anticipated economic conditions, and other factors that deserve current
recognition in estimating future loan losses. Management's assessment of the
adequacy of the allowance is subject to evaluation and adjustment by Guaranty's
regulators.
There were loan charge-offs for the three months ended June 30, 2002 of $48,000,
compared to $9,000 for the same period a year ago. At June 30, 2002, Guaranty
had $119,000 of loans that were 90 days or more past due. Of this total, no
loans were considered to be non-accrual. At June 30, 2002, the allowance for
loan losses was $2.5 million or 1.52% of total loans. Management believes that
the allowance for loan losses is adequate to cover loan losses inherent in the
loan portfolio at June 30, 2002, and that loans classified as special mention,
substandard, doubtful and loss have been adequately reserved. Although
management believes that it uses the best information available to make such
determinations, future adjustments to the allowance for loan losses may be
necessary, and net income could be significantly affected, if circumstances
differ substantially from assumptions used in making the initial determinations.
Non-interest Income
Non-interest income was $545,000 for the three months ended June 30, 2002,
compared with $600,000 for the same period a year ago. This change was primarily
due to a decrease in mortgage banking income to $153,000 for the most recent
quarter compared to $295,000 for the same period a year ago. For the six months
ended June 30, 2002, Guaranty's non-interest income was $1.2 million, a $21,000
increase over the same period a year ago. During 2001, Guaranty changed its
mortgage banking business model to sell all residential fixed rate mortgage
loans on a servicing released basis. In addition, Guaranty sold its mortgage
loan servicing rights related to mortgage loans serviced for others. The revised
mortgage banking business model eliminates the secondary market interest rate
risk through simultaneously locking a mortgage loan rate with the borrower and a
correspondent investor at the same time. The 2001 sale of existing mortgage
servicing rights and the continued sale of mortgage loans on a servicing
released basis eliminated the valuation volatility associated with retained
servicing rights. The results for the three months ended June 30, 2001, included
a $35,000 gain in the value of the mortgage loan servicing rights.
Fees on deposit accounts decreased by 7.4% to $189,000 for the most recent
quarter compared to $204,000 for the same period a year ago. Investment sales
commissions decreased to $38,000 for the three months ended June 30, 2002,
compared to $59,000 for the same period a year ago due to reduced sales volume.
13
Non-interest Expense
Non-interest expense was $2.1 million for the quarter ended June 30, 2002, a
$239,000 decrease over the amount reported for the same period last year. The
decrease is primarily attributable to the elimination of personnel and occupancy
expenses due to the sale of a retail banking office in the suburban Richmond
market, the right sizing of administrative function including information
technology and mortgage banking administration, and limited marketing expense in
the most recent quarter. The expenses related to the suburban Richmond retail
banking office were included in the 2001 financial statements until July 2001
when the sale transaction was consummated. Marketing expense was $29,000 for the
most recent quarter compared to $54,000 for the same period a year ago.
Marketing expense should increase throughout the remainder of 2002 as activity
increases. For the six months ended June 30, 2002, Guaranty's non-interest
expense was $4.2 million, a 10.3% decrease from $4.7 million for the same period
a year ago.
Income Tax Expense
Guaranty recognized income tax expense of $193,000 for the three months ended
June 30, 2002, compared to income tax expense of $4,000 for the same period in
2001. The effective tax rate for the most recent quarter was 31.1% compared to
33.8% for the same period a year ago. The lower effective tax rate for the most
recent quarter was due to an increase in non-taxable income from bank owned
insurance. The net increase in income tax expense between periods was a result
of increases in the level of taxable income.
Liquidity and Capital Resources
Liquidity is the ability to meet present and future financial obligations either
through the sale of existing assets or through the acquisition of additional
funds through asset and liability management. Guaranty's primary sources of
funds are deposits, borrowings and amortization, prepayments and maturities of
outstanding loans and securities. While scheduled payments from the amortization
of loans and securities are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. Excess funds are invested in overnight
deposits to fund cash requirements experienced in the normal course of business.
Guaranty has been able to generate sufficient cash through its deposits as well
as through its borrowings.
Guaranty uses its sources of funds primarily to meet its on-going operating
expenses, to pay deposit withdrawals and to fund loan commitments. During the
most recent quarter, total loans declined by approximately $700,000 and
certificates of deposit declined by approximately $13.6 million. These decreases
were a result of strategic decisions. Guaranty has been very targeted in its
lending approach and has desired to reduce its funding reliance on certificates
of deposit. At June 30, 2002, total approved loan commitments outstanding were
approximately $6.0 million. At the same date, commitments under unused lines of
credit were approximately $55.8 million. Certificates of deposit scheduled to
mature in one year or less at June 30, 2002, were $80.0 million. Management
believes that a significant portion of maturing deposits will remain with
Guaranty. If these certificates of deposit do not remain with Guaranty, it will
have to seek other sources of funding that may be at higher rates or reduce
assets.
14
The reduction in total assets has positively impacted Guaranty's regulatory
capital ratios. At June 30, 2002, regulatory capital was in excess of amounts
required by Federal Reserve regulations to be considered well capitalized as
shown in the following table (dollars in thousands):
Actual Actual Amount Percent Excess
Amount Percentage Required Required Amount
------------ ------------ ------------ ------------ ------------
Leverage Ratio $ 23,489 11.01% $ 8,533 4.00% $ 14,956
Tier 1 Risk Based Capital 23,489 13.56% 6,929 4.00% 16,560
Total Risk Based Capital 25,797 14.89% 13,858 8.00% 11,939
Regulatory Issues
In October 2000, Guaranty and the Bank entered into a written agreement with the
Federal Reserve Bank of Richmond ("FRB") and the Bureau of Financial
Institutions of the Commonwealth of Virginia ("BFI") with respect to various
operating policies and procedures. Various bank operating policies including
asset/liability management, liquidity, risk management, loan administration and
capital adequacy were rewritten and approved by bank regulators in 2001.
Guaranty is restricted from paying future dividends or incurring any debt at the
parent company level without prior regulatory approval. In addition, the Bank is
prohibited from paying intercompany dividends to Guaranty without prior
regulatory approval. Absent this intercompany dividend, Guaranty does not have
sufficient resources to make the payments due on its outstanding subordinated
debt securities.
Guaranty and the Bank have received regulatory approval for an intercompany
dividend in an amount sufficient to make the September 15, 2002, payment due on
its subordinated debt securities. While the FRB and the BFI have approved all
quarterly dividend payment requests since the written agreement was executed, no
assurances can be given that future requests will be approved.
Forward Looking Statements
Certain statements in this quarterly report on Form 10-QSB may include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements are generally identified by the use
of words such as "believe", "expect", "anticipate", "should", "planned",
"estimated", and "potential". These statements are based on Guaranty's current
expectations. A variety of factors could cause Guaranty's actual results to
differ materially from the anticipated results or other expectations expressed
in such forward-looking statements. The risks and uncertainties that may affect
the operations, performance, development, and results of Guaranty's business
include interest rate movements, competition from both financial and
non-financial institutions, the timing and occurrence (or nonoccurrence) of
transactions and events that may be subject to circumstances beyond Guaranty's
control, and general economic conditions.
15
Part II. Other Information
---------------------------
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities and Use of Proceeds
Not Applicable
Item 3 Defaults Upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
On April 25, 2002, the Company's Annual Meeting of
Shareholders was held to elect three directors to serve on its
Board of Directors for terms of three years each. The results
of the votes were as follows:
For Withheld
--- --------
William E. Doyle, Jr. 1,738,435 57,508
Jason I. Eckford, Jr. 1,738,435 57,508
Harry N. Lewis 1,738,263 57,680
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Statement of Chief Executive Officer and
and Chief Financial Officer Pursuant to
18 USC ss 1350.
(b) Reports on Form 8-K - None
16
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GUARANTY FINANCIAL CORPORATION
Date: August 13, 2002 By: /s/ William E. Doyle, Jr.
--------------------------------------------------
William E. Doyle, Jr.
President and Chief Executive Officer
Date: August 13, 2002 By: /s/ Thomas F. Crump
--------------------------------------------------
Thomas F. Crump
Senior Vice President and Chief Financial Officer